TAX LOSS HARVESTING: What it is?

By Staff Reporters

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What Is Tax-Loss Harvesting?

Tax-loss harvesting is the timely selling of securities at a loss in order to offset the amount of capital gains tax due on the sale of other securities at a profit. 

This strategy is most often used to limit the amount of taxes due on short-term capital gains, which are generally taxed at a higher rate than long-term capital gains. However, the method may also offset long-term capital gains. This strategy can help preserve the value of the investor’s portfolio while reducing the cost of capital gains taxes.

There is a $3,000 limit on the amount of capital gains losses that a federal taxpayer can deduct in a single tax year. However, Internal Revenue Service (IRS) rules allow additional losses to be carried forward into the following tax years.

4 Key Points

  • Tax-loss harvesting is a strategy investors can use to reduce the total amount of capital gains taxes due from the sale of profitable investments.
  • The strategy involves selling an asset or security at a net loss.
  • The investor can then use the proceeds to purchase a similar asset or security, maintaining the portfolio’s overall balance.
  • The investor must be careful not to violate the IRS rule against buying a “substantially identical” investment within 30 days.

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